Despite a defensive approach, Heron House’s Wayne Evans has tried to catch a New Year rally, and has bought British Empire Securities and General Trust at 422.5p.
Strategy: My inclination is to be defensive this year and protect capital, but at the time of writing this there does seem to be an early New Year rally under way so I tried to catch some of this.
Charity supported: St Anne’s Hospice, Newport
Investment trust: British Empire Securities & General Trust
Price purchased: 422.5p
Net asset value: 450p
This trust has a great long-term track record but has suffered in recent times with its emphasis on European holding companies. It is currently on a 7% discount but it is estimated that the discount on the underlying holdings is in excess of 30%. I have invested around a quarter of my £4,000 portfolio into British Empire Securities.
The contestant’s view by Wayne Evans
In the mid-19th century, Queen Victoria was on the throne and the British Empire was at the height of its power. At the same time, the first investment trusts were launched with the aim of providing smaller investors with the same advantages as wealthy capitalists. Their survival for over 120 years is testament to their quality.
Today many of them still have the same objectives of securing long-term growth in capital and income through investing in internationally diversified portfolios.
Some studies show investment trusts outperform their unit trust counterparts over the long term, and their total expense ratios are in some cases as cheap as on passive funds; but there are many other advantages.
One advantage is being able to gain access to specialist areas, such as infrastructure and private equity, which are not readily available to the private investor. Being closed ended means the managers do not have to worry about excessive inflows and outflows of cash and can concentrate on the long term.
It is easy to buy and sell investment trusts throughout the day, like any quoted equity. The possibility of buying a good quality trust at a discount can benefit the watchful investor, offering the ability to hold income reserves to smooth out income payments to shareholders: a number of trusts have been able to pay increasing dividends to shareholders for well over 40 years.
The commission barrier
The advantages are well known, yet investment trusts have not been recommended in the numbers their quality deserves. The main reason is commission.
I do not blame advisers because many of us have been rewarded solely by commission; and a unit trust that pays initial and renewal commission is preferable to an investment trust that pays neither.
Advisers who were interested in recommending an investment trust could only do so through offshore bonds or through some of the investment trust savings schemes that paid commission.
Commission will be banned under the retail distribution review, and advisers who wish to retain their independent status must charge a fee for advice. The theory is that, without any financial incentive to sell one type of fund, advisers will have to consider investment trusts on their merits.
Reduction of bias
The development of the wrap platform facility has had a big impact on the number of investment trusts being recommended. Having agreed client fee arrangements has meant that, irrespective of whether a unit trust, investment trust or ETF is held, the adviser will be paid the same fee. This should help reduce bias and lead to the investment trust recommendations increasing where appropriate.
Unfortunately, the financial services industry tends to be polarised, often for vested interests. It should not be a case of either unit trusts or investment trusts; both should be considered and used as complementary to each other. There are many superb unit trusts available, and I frequently recommend them to clients.
Will higher qualifications among advisers lead to greater use of investment trusts? I have my doubts. Speaking informally to advisers, a common response is ‘investment trusts are too complicated’. Taking investment exams and understanding the workings of investment trusts is a good start, but to appreciate them fully requires a great deal of reading and experience.
The New Model Adviser® Investment Trust Challenge is running for 12 months until 31 December 2012. Four participants are investing an equal portion of £16,000 of Citywire’s money in investment trusts. Any profits made will go to charity. Citywire will bear any losses. The participants are: Andrew Chorley (Financial Planning Wales), Wayne Evans (Heron House Financial Management), Diane Weitz (Ashlea Financial Planning) and David Sandham (Citywire).